In case you missed it, last week, we discussed search-powered AI and the battle between Google and Microsoft. This week, we discuss the business of space.
Space: the final business frontier
On January 15th, 2023, SpaceX’s largest rocket, the Falcon Heavy, conducted its fifth launch in five years. It is currently the second largest rocket in the world, second only to NASA’s Space Launch System (the SLS). After delivering its payload, two boosters self-landed back on the launch pad.
The fact that these rockets can self-land is truly a technical marvel, one that has now been taken for granted by most people. Consider the following facts:
- These boosters are 70 meters tall (an equivalent of 21 stories)
- They weigh a combined 550 tonnes (more than a jumbo jet)
- After these boosters deliver their payload at a certain height, they fall to earth at a speed of 4,700km per hour (1.5x faster than a speeding bullet)
- They then slow down 200km from the surface and land vertically at a landing zone (either at the original launch site or on a floating offshore drone)
The reusability of boosters is critical in driving the cost of bringing payload into space. After mastering reusability, SpaceX has delivered the lowest per-unit payload to earth’s orbit. At $2,600 per kg and $1,500 per kg, the company’s Falcon 9 and Falcon Heavy are industry cost leaders (Figure 2 below). Currently, Falcon Heavy’s delivery cost is 43x lower than the Space Shuttle.
A low launch environment is a prerequisite for the space economy to thrive. To understand the recent changes in the cost curve and how they may contribute to the expansion of the space economy, it’s helpful to understand the beginning of the space industry and how it transitioned from nation-state driven to private industry-focused.
The Sputnik moment
On October 4th, 1957, from the windy steppe of southern Kazakhstan, the Soviet Union (USSR) launched the first artificial satellite into Earth’s orbit. This event caught the world, particularly the US, by surprise. Not in their wildest dreams did the Americans expect the Soviet Union to have the technological capabilities to carry out such a feat.
This event kicked off the space race between the two countries. In reaction to Sputnik, the US government expanded funding for the STEM (science, technology, engineering, and math) discipline and formed NASA, to better coordinate space exploration efforts under a civilian umbrella.
In the early days of the space race, it was not clear that the US would emerge the victor, as USSR continued beating the US by setting new historical milestones, which culminated in April 1961, when Soviet Cosmonaut Yuri Gagarin became the first person to reach outer space. That same year, US President John F. Kennedy set an audacious, seemingly impossible national goal of “landing a man on the moon and returning him safely to Earth within a decade.”
Funds began to pour in. NASA’s budget soared in the 60s (see Figure 3 below). At its peak in 1965, NASA’s budget was 4.3% of the Federal budget. Overall, between 1960 and 1973, the US government spent about $257 billion (in 2020 dollars) on the Apollo program. However, NASA’s budget started to slowly decline after the collapse of the USSR in 1991.
For the better part of 50 years till the late-2000s, space launches were dominated by nation-states. This was because, for the US in particular, NASA employed a “cost plus” model, where NASA would pay contractors their expenses plus a fee to develop systems that NASA would then own. This model has yielded poor economic results because contractors are not incentivized to innovate and drive down costs, as they would always make profits no matter how much they spent on development. Projects would often incur extreme cost overruns. This is why payload delivery costs (shown in Figure 2 above) were roughly flat up to 2010.
In 2005, NASA changed its development model to one where contractors are incentivized to have more skin in the game (via the Commercial Orbital Transportation Services program, COTS). With the new program, the spacecraft would be owned and financed by private companies rather than NASA, leading to the privatization of space exploration that we see today.
Beginning of privatization
SpaceX was founded in 2002 with the goal of decreasing costs and improving the reliability of access to space. Before founding SpaceX, Musk briefly flirted with buying converted intercontinental ballistic missiles from Russia. However, increased political tensions between the US and Russia, as well as cost considerations pushed Musk to build his own rockets.
SpaceX’s first rocket, the Falcon 1, was developed with internal funding, with a budget estimated to be between $90 million – $100 million, a pittance when compared to a traditional rocket development budget. The first three attempts, between 2006 and 2008, failed, pushing Musk to near bankruptcy. The fourth, in September 2008, was a success and saved the company. Overall, it took the company only six years and four months to reach orbit, a record time between inception and reaching orbit, which it held for more than 15 years until 2021, when Astra, another private rocket company, broke the record.
Note: if you’re interested in learning more about this specific period of SpaceX, I highly recommend Ashley Vance’s Musk Biography and Eric Berger’s Liftoff, which chronicled the odds-defying first four launches of SpaceX.
Since then, SpaceX has continued to pave the way for pushing down costs and increasing reliability. It currently holds the record for most launches and landings. SpaceX’s Falcon 9 rockets have launched 210 times in 13 years, with a 99% mission success rate (Figure 4 below).
Now that we have a much lower cost profile and reliability to deliver payloads to space, what comes next?
The space economy
Broadly, we can categorize the space economy into two, based on where the core value is delivered: (1) earth-to-space and space-to-earth, and (2) space-to-space.
Earth-to-space and Space-to-earth
The earth-to-space and space-to-earth category is the more developed category. This includes delivering payloads to the earth’s orbit and returning them safely. But it also includes services that can be provided to customers on earth from outer space.
Over the past decade, the number of private rocket companies has exploded:
- You have the old incumbents Northrop Grumman and United Launch Alliance, the latter being a joint venture between Boeing and Lockheed Martin
- Well-funded private companies such as SpaceX and Jeff Bezos’ Blue Origin
- And many others (Astra Space, Relativity, Rocket Labs, Virgin Orbit, etc.)
The companies in this segment are primarily focused on delivering the payload to orbit. These payloads can be satellites, cargo, or humans (astronauts and space tourists). As costs continue to fall, sending the ashes of your loved ones to orbit earth costs have even become relatively affordable (about $2,500, and these ashes typically use the excess capacity on SpaceX’s rockets).
But the largest impact of reduced payload cost is on the satellite industry. We are sending satellites into space at an unprecedented rate. So far, the US dominates this race. In 2022, the US launched 83% of all objects (satellites, probes, landers, etc.), while China is a distant second (at 6%).
Most of these satellites are low earth orbit (LEO) objects that offer communication and observational capabilities.
On communication, SpaceX’s Starlink constellation has proven to be a game changer. It provides robust and fast internet connectivity globally. It is especially useful in areas where traditional internet connectivity is not available. This includes internet coverage in rural areas, in airplanes and oceans, and for IOT devices. SpaceX has partnered with traditional telco providers to add rural coverage and backhaul connectivity. But for the military specifically, Starlink’s capabilities have been paradigm-shifting. In Ukraine, Starlink connectivity has been invaluable in the fight against the Russian army, a development that has alarmed the Chinese government.
SpaceX’s Starlink is not the sole player in the space internet race. OneWeb and Amazon’s Kuiper are two others. In terms of coverage, though, Starlink’s is unparalleled. OneWeb has only about 648 satellites. In contrast, Starlink has 3,580 small satellites covering Earth.
The biggest challenge to establishing this constellation is the upfront capital expenditures to manufacture and deploy the satellites. The vertical integration between SpaceX and Starlink has allowed them to overcome this challenge:
- Compared to the previous generation of internet satellites, which are deployed at geosynchronous orbit (or GEO at 36,000km above earth), LEO satellites are deployed much closer (500-2,000km above Earth). As a result, LEO satellites are cheaper to deploy and have much lower latency (faster response time), which makes them more suitable for high-speed communication applications. The tradeoff, though, is that you need a lot more satellites to provide the same coverage.
- Compared to other new LEO constellation providers, Starlink benefits from being vertically integrated with SpaceX. This means that SpaceX can generate its own marginal demand. Any excess capacity can be allocated to Starlink satellites at marginal costs. As a result, Starlink enjoys the cheapest cost of satellite delivery.
Because Starlink enjoys a cost advantage in satellite deployment, it can experiment with more advanced hardware at the risk of a higher failure rate. In contrast, the old satellite providers must use technology that has been proven on the ground, which means that they can only use older established technology.
Nevertheless, this is still an immense undertaking requiring significant investments. Many companies will die before they can establish the required constellation to establish service, let alone acquire customers. In an interview, Musk mentioned that Starlink still requires $5-10 billion in capex to fully deploy its constellation.
As of end-2022, SpaceX announced that it has more than one million subscribers. We don’t know how much the average subscriber pays (the company charges different fees in different countries), but let’s assume it is roughly $100 per month. One million subscribers translate to $100 million monthly recurring revenue or $1.2 billion per year. Even if the cash is subsidized by SpaceX’s launch business, which may be of the order of $2 billion per year. It is likely that the company is not cash flow positive and requires significant outside investments. NASA and defensive contracts help on this front.
On observational capabilities, many of these LEO satellites offer services to observe the earth. These services are increasingly used for military purposes, scientific research, investment, and damage assessments during natural disasters.
Space-to-space
This segment is more futuristic. Many of these use cases are still in the research and development stage. As the cost of launch gets low enough, there will be more manufacturing in space, private space stations, refueling pods, and even space colonization (the moon and Mars). It will take decades to play out, however.
The hype is real
Over the past decade, almost $300 billion have been invested in 1,791 companies. A handful of these companies went public via SPAC a few years ago. The latest was Intuitive Machine, a lunar exploration company, which after its SPAC merger, saw its share price jump 250%. But the majority of shareholders from the SPAC decided to redeem their shares (convert the shares they bought before the merger into cash) – not a huge sign of confidence. Overall, most space-related SPACs have underperformed. Many are trading below their SPAC price.
While there are many proposed use cases, most of the observational and connectivity use cases are not, as of yet, translating into positive cash flows for these companies. Take Planet Lab (PL), for example. It is one of the market leaders in providing satellite observational capabilities and analytics. In the 12th year after its founding, it has generated only $131 million in revenue, growing 16% year-over-year, with a -98% operating margin. This paints a rather grim picture, especially in this current macro environment, where capital is expensive. Planet Lab, just like many of its peers, has to spend a lot of capex to build its constellation satellite, develop the technology stack, and serve a relatively small and still niche market.
Technological revolutions and bubbles come hand in hand
In her 2002 seminal book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, Carlota Perez argued that technological revolutions typically follow an S-curve that is split into two periods:
- Installation period: The curve begins when the new technology is identified, money starts to pour in, and infrastructures get built. Eventually, everyone gets caught up in the narrative, and the pace of investments outpaces fundamentals.
- Deployment period: Inevitably, bubbles burst. Many of the early companies will go bust. A period of consolidation happens, followed by productivity gains from the new technology.
The above cycle typically takes about 50-60 years to play out. The pattern has been observed over the past 200 years, from the railway bubble, both in the US and the UK, to the dot-com bubble.
Note: for an excellent summary of this subject, please read this article.
For the space economy, we are likely still in the early stages of the installation period. Currently, NASA is the biggest customer for many private space companies. But there are only so many contracts NASA can reward. In the meantime, the hype and excitement continue. Inevitably, a space winter (from an investment perspective) will arrive. Consolidation will occur, and only then will productive implementation continue.
